Fed Tells Wall Street, Giddy-Up! Again!

This is getting just plain sick, and not in the good sense as the millennials use the term. With gold, the Dow and home prices at all-time highs, other US equity indices and cryptos near all-times highs, and a bubble in Mag 7 stocks more extreme that the 1999-2000 Dotcom Bubble ever was, the Fed is actually fixing to cut rates at its next meeting.

Giddy-Up! Or as the astute folks at Northman Traderdinged,

Now that our ‘restrictive’ monetary policy has brought asset prices back to
200% market cap to GDP and home prices are at their highest price levels ever let’s begin the next easing cycle and loosen financial conditions so we can safely embark onto the next asset bubble.

The very prospect of restarting the printing presses is testimony to both the Fed’s unremitting arrogance and its utter servility—witting or not—to the speculators, gamblers and entitled greedmeisters of Hedge Fund Land.

Of course, the impending September cut is supposedly a preemptive move to “get ahead of the curve” with respect to a softening labor market and economy. Yet that’s just the arrogance of it.

When has the Eccles Building ever been ahead of the curve? When has it ever had the clairvoyance to see more than a few weeks down the road or to even actually comprehend where the blooming, buzzing $28 trillion mass of the US economy, and the even more opaque $105 trillion global economy in which it is inextricably enmeshed, actually stood…..last week, last month or even last quarter?

A cogent testimony to the Fed’s inability to time its interest rate machinations was recently provided by Ryan McMaken. Almost without exception the recessions which inexorably follow the Fed’s exercises in “stimulus” are almost always underway when it belatedly begins one of its perennial rate-cutting cycles.

In fact, if anything, the fact that the Fed now plans to start cutting rates is one of the strongest recession signals we can get.

If we look back at the relationship between rate cuts and recessions, we see that in almost every case that recessions begin shortly after the Fed starts a cycle of rate cuts. The fed started cutting the Fed funds rate in 1989. Then we got the recession of the early 90s. In late 2000, the fed started the rate cuts again. We got a recession in 2001. The Fed did it again in late 2007. The recession began in December 2007, followed by a financial crisis several months later. This relationship even holds for the 2020 recession because even without COVID there would have been a recession in late 2020. The Fed had begun to ease the target rate in summer 2019.